The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Condensed Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated
interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim
financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. The information furnished reflects all adjustments, consisting only of normal recurring
items which are, in the opinion of management, necessary in order to make the financial statements not misleading. The consolidated financial
statements as of December 31, 2020 have been audited by an independent registered public accounting firm. The accounting policies and
procedures employed in the preparation of these condensed consolidated financial statements have been derived from the audited financial
statements of the Company for the year ended December 31, 2020, which are contained in Form 10-K as filed with the Securities and Exchange
Commission on April 15, 2021. The consolidated balance sheet as of December 31, 2020 was derived from those financial statements.
Basis of Presentation and Principles of
Consolidation
The consolidated financial statements and accompanying
notes are prepared in accordance with generally accepted accounting principles of the United States of America (“U.S. GAAP”)
and the rules and regulations of the U.S Securities and Exchange Commission for Interim Financial Information. The condensed consolidated
financial statements of the Company include the Company and its wholly owned subsidiaries. All intercompany transactions and balances
have been eliminated. All adjustments (consisting of normal recurring items) necessary to present fairly the Company’s financial
position as of September 30, 2021, and the results of operations for three and nine months and cash flows for the nine months ended September
30, 2021 have been included. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative
of the results to be expected for the full year.
Description of Business
DarkPulse,
Inc. ("DPI" or "Company") is a technology-security company incorporated in 1989 as Klever Marketing, Inc. ("Klever").
Its’ wholly-owned subsidiary, DarkPulse Technologies Inc. ("DPTI"), originally started as a technology spinout from the
University of New Brunswick, Fredericton, Canada. The Company’s security and monitoring systems will initially be delivered in applications
for border security, pipelines, the oil and gas industry and mine safety. Current uses of fiber optic distributed sensor technology have
been limited to quasi-static, long-term structural health monitoring due to the time required to obtain the data and its poor precision.
The Company’s patented BOTDA dark-pulse sensor technology allows for the monitoring of highly dynamic environments due to
its greater resolution and accuracy.
On April 27, 2018, Klever entered into an Agreement
and Plan of Merger (the “Merger Agreement” or the “Merger”) involving Klever as the surviving parent corporation
and acquiring a privately held New Brunswick corporation known as DarkPulse Technologies Inc. as its wholly owned subsidiary. On July
18, 2018, the parties closed the Merger Agreement, as amended on July 7, 2018, and the name of the Company was subsequently changed to
DarkPulse, Inc. With the change of control of the Company, the Merger is being accounted for as a recapitalization in a manner similar
to a reverse acquisition.
On July 20, 2018, the Company filed a Certificate
of Amendment to its Certificate of Incorporation with the State of Delaware, changing the name of the Company to DarkPulse, Inc. The Company
filed a corporate action notification with the Financial Industry Regulatory Authority (FINRA), and the Company's ticker symbol was changed
to DPLS.
The Company has recently completed several acquisitions.
See Note 2 – Business Acquisitions for more information.
Going
Concern Uncertainty
As shown in the accompanying financial statements,
during the nine months ended September 30, 2021, the Company reported a net loss of $1,924,311. As of September 30, 2021, the Company’s
current liabilities exceeded its current assets by $12,139,502. As of September 30, 2021, the Company had $2,564,492 of cash.
The Company will require additional funding to
finance the growth of our operations and achieve our strategic objectives. These factors, as relative to capital raising activities, create
doubt as to our ability to continue as a going concern. We are seeking to raise additional capital and are targeting strategic partners
in an effort to accelerate the sales and marketing of our products and begin generating revenues. Our ability to continue as a going concern
is dependent upon the success of future capital offerings or alternative financing arrangements, expansion of our operations and generating
sales. The accompanying financial statements do not include any adjustments that might be necessary should we be unable to continue as
a going concern. Management is actively pursuing additional sources of financing sufficient to generate enough cash flow to fund its operations
however, management cannot make any assurances that such financing will be secured.
Use of Estimates
In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of
the statements of financial condition, and revenues and expenses for the years then ended. Actual results may differ significantly from
those estimates. Significant estimates made by management include, but are not limited to, the assumptions used to calculate stock-based
compensation, derivative liabilities, preferred deemed dividend and common stock issued for services.
COVID-19
Pandemic
On January 30, 2020, the World Health Organization
(WHO) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”)
and the risks to the international community as the virus spread globally beyond the point of origin. On March 20, 2020 the WHO classified
the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak continues
to evolve as of the date of these condensed consolidated financial statements. As such, it is uncertain as to the full magnitude that
the pandemic will have on the Company’s combined financial condition, liquidity and future results of operations. Management is
actively monitoring the impact of the global situation on its consolidated financial condition, liquidity, operations, suppliers, industry
and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able
to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021
beyond the results presented in these condensed consolidated financial statements and this quarterly report.
Due to the impacts of COVID-19 we have seen an
increase in recruiting and labor costs as well as delays in supply chain.
Revenue
Recognition
The Company’s revenues are generated primarily
from the sale of our products, which consist primarily of advanced technology solutions for integrated communications and security systems.
At contract inception, we assess the goods and services promised in the contract with customers and identify a performance obligation
for each. To determine the performance obligation, we consider all products and services promised in the contract regardless of whether
they are explicitly stated or implied by customary business practices. The timing of satisfaction of the performance obligation is not
subject to significant judgment. We measure revenue as the amount of consideration expected to be received in exchange for transferring
goods and services. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria
have been met.
The Company recognizes revenue when its customer
obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for
those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606,
we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract;
(iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize
revenue when (or as) we satisfy a performance obligation. The five-step model is applied to contracts when it is probable that we will
collect the consideration we are entitled to in exchange for the goods or services transferred to the customer. At contract inception,
once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine
those that are performance obligations and assess whether each promised good or service is distinct. We then recognize revenue in the
amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is
satisfied.
In accordance with ASU No. 2016-12, Revenue
from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedient, which is to (1) clarify the objective
of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for
all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract
inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before
the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the
transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed
contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP
before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each
prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The amendments of this
ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. There was no impact
as a result of adopting this ASU on the financial statements and related disclosures. Based on the terms and conditions of the product
arrangements, the Company believes that its products and services can be accounted for separately as its products and services have value
to the Company’s customers on a stand-alone basis. When a transaction involves more than one product or service, revenue is allocated
to each deliverable based on its relative fair value; otherwise, revenue is recognized as products are delivered or as services are provided
over the term of the customer contract.
Contract liabilities is shown separately in
the unaudited consolidated balance sheets as current liabilities. At September 30, 2021 and December 31, 2020, we had contract
liabilities of $2,699,688 and $0, respectively.
Cost of Product Sales and Services
Cost of sales consists primarily of materials,
airtime and overhead costs incurred internally and amounts incurred to contract manufacturers to produce our products, airtime and other
implementation costs incurred to install our products and train customer personnel, and customer service and third-party original equipment
manufacturer costs to provide continuing support to our customers. There are certain costs which are deferred and recorded as prepaids,
until such revenue is recognized. Refer to revenue recognition above as to what constitutes deferred revenue.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with high
credit quality financial institutions. The Company’s account at this institution is insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $250,000.
To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of
the financial institution in which it holds deposits.
Intangible Assets
The Company reviews intangibles held and used
for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In evaluating the fair value and future benefits of its intangible assets, management performs an analysis of the anticipated undiscounted
future net cash flow of the individual assets over the remaining amortization period. The Company recognizes an impairment loss if the
carrying value of the asset exceeds the expected future cash flows.
Goodwill and other intangible assets
In accordance with ASC 350-30-65, “Intangibles
- Goodwill and Others”, the Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
Factors the Company considers to be important
which could trigger an impairment review include the following:
|
·
|
Significant underperformance relative to expected historical or projected
future operating results;
|
|
·
|
Significant changes in the manner of use of the acquired assets or the strategy
for the overall business; and
|
|
·
|
Significant negative industry or economic trends.
|
When the Company determines that the carrying
value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying
value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures
any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with
the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment
exists and in projecting cash flows.
Foreign Currency Translation
The Company’s reporting
currency is U.S. Dollars. The accounts of one of the Company’s subsidiaries, Optilan, is maintained using the appropriate local
currency, Great British Pound, as the functional currency. All assets and liabilities are translated into U.S. Dollars at balance sheet
date, shareholders’ equity is translated at historical rates and revenue and expense accounts are translated at the average exchange
rate for the year or the reporting period. The translation adjustments are reported as a separate component of stockholders’ equity,
captioned as accumulated other comprehensive (loss) gain. Transaction gains and losses arising from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the statements of operations.
The relevant translation rates are as follows:
for the three and nine months ended September 30, 2021, closing rate at 1.3468
US$: GBP, quarterly average rate at 1.3787
US$: GBP.
Income Taxes
The Company accounts for income taxes in accordance
with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes. Under this method,
deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax
basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes
to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions
in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating
results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities
may be required. Valuation allowances are recorded related to deferred tax assets based on the "more likely than not" criteria
of ASC 740.
ASC 740-10 requires that the Company recognize
the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the "more-likely-than-not" threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with
the relevant tax authority.
Leases
Effective January 1, 2019, the Company accounts
for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating
or financing leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by
discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate.
Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease
term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent
expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right of use asset results
in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.
In calculating the right of use asset and lease
liability, the Company has elected to combine lease and non-lease components. The Company excludes short-term leases having initial terms
of 12 months or less from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over
the lease term.
Accounting for Derivatives
The Company evaluates all of its financial instruments
to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments
that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments,
the Company uses a probability weighted average series Binomial lattice formula pricing models to value the derivative instruments at
inception and on subsequent valuation dates.
The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.
Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within 12 months of the balance sheet date.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial
assets and liabilities, such as cash, prepaid expenses, and accruals approximate their fair values because of the short maturity of these
instruments. The Company believes the carrying value of its secured debenture payable approximates fair value because the terms were negotiated
at arm’s length.
Recent Accounting Pronouncements
There were no new accounting pronouncements issued
or proposed by the Financial Accounting Standards Board during the three months ended September 30, 2021, and through the date of filing
of this report that the Company believes has had or will have a material impact on its financial position or results of operations, including
the recognition of revenue, cash flow, the merger that was consummated on July 18, 2018. The Company has no lease obligations.
Income (Loss) Per Common Share
Basic net income (loss) per share of common stock
is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income
(loss) per share of common stock is computed by dividing net income (loss) by the sum of the weighted average number of common shares
outstanding and the dilutive potential common share equivalents outstanding. Potential dilutive common share equivalents consist of shares
issuable upon exercise of outstanding convertible preferred stock and stock options.
For the three and nine months ended September
30, 2021, there were no stock options outstanding. For the three and nine months ended September 30, 2021, common stock equivalents related
to convertible preferred stock and convertible debt have not been included in the calculation of diluted loss per common share because
they are anti-dilutive. Therefore, basic loss per common share is the same as diluted loss per common share. There are 1,970,029,676
common shares reserved for the potential conversion of the Company's convertible debt.
NOTE 2 – BUSINESS ACQUISITIONS
Optilan Holdco 3 Limited
On August 9, 2021, the Company entered into a
Share Purchase Agreement with Optilan Guernsey Limited and Optilan Holdco 2 Limited (the “Sellers”), pursuant to which the
Company purchased from the Sellers all of the issued and outstanding equity interests of Optilan HoldCo 3 Limited, a private company incorporated
in England and Wales (“Optilan”) for £1.00 and also a commitment to enter into the Subscription (as defined below).
As of August 9, 2021, the Company owns all of the equity interests of Optilan.
The Company has accounted for the purchase using
the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the
underlying assets and liabilities in proportion to their respective fair values. The excess of the consideration transferred over the
estimated fair values of the net assets acquired was recorded as goodwill. The following table summarizes the acquired assets and assumed
liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the Condensed Consolidated
Balance Sheet at September 30, 2021:
Schedule of fair value of assets and liabilities
in acquisition
|
|
|
|
|
|
|
Fair Value
|
|
Cash
|
|
$
|
736,177
|
|
Accounts receivable
|
|
|
4,619,381
|
|
Inventory
|
|
|
2,040,887
|
|
Unbilled revenue
|
|
|
540,321
|
|
Property & equipment
|
|
|
1,393,274
|
|
Right of use
|
|
|
1,385,825
|
|
Goodwill
|
|
|
12,181,350
|
|
Total assets
|
|
|
22,891,215
|
|
Accounts payable
|
|
|
11,622,018
|
|
Contract deposits
|
|
|
3,168,493
|
|
Contract liabilities, current
|
|
|
4,139,193
|
|
Lease liabilities, current
|
|
|
141,730
|
|
Other current liabilities
|
|
|
2,496,725
|
|
Lease liabilities, noncurrent
|
|
|
628,529
|
|
Total purchase consideration
|
|
$
|
694,527
|
|
This purchase price allocation is preliminary
and is pending the finalization of the third-party valuation analysis and working capital, as the Company has not yet completed the detailed
valuation analyses as of the filing date of this Form 10-Q.
Wildlife Specialists, LLC and Remote Intelligence,
LLC
On August 30, 2021, we closed two separate Membership
Interest Purchase Agreements (the “MPAs”) with Remote Intelligence, Limited Liability Company, a Pennsylvania limited
liability company (“RI”) and Wildlife Specialists, LLC, a Pennsylvania limited liability company (“WS”)
pursuant to which we agreed to pay to the majority shareholder of each of RI and WS an aggregate of 15,000,000 shares of our Common Stock,
$500,000 to be paid on the closing date, and an additional $500,000 to be paid 12 weeks from closing date in exchange for 60% ownership
of each of RI and WS. RI and WS are now subsidiaries of the Company.
The Company has accounted for the purchase using
the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the
underlying assets and liabilities in proportion to their respective fair values. The excess of the consideration transferred over the
estimated fair values of the net assets acquired was recorded as goodwill. The following table summarizes the acquired assets and assumed
liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the Condensed Consolidated
Balance Sheet at September 30, 2021:
Schedule of fair value of assets and liabilities
in acquisition
|
|
|
|
|
WILDLIFE SPECIALISTS
|
|
Fair Value
|
|
Cash
|
|
$
|
33,910
|
|
Accounts receivable
|
|
|
161,866
|
|
Other current assets
|
|
|
600
|
|
Property & equipment
|
|
|
99,490
|
|
Goodwill
|
|
|
1,191,085
|
|
Total assets
|
|
|
1,486,951
|
|
Accounts payable
|
|
|
151,888
|
|
Other current liabilities
|
|
|
241,763
|
|
Total purchase consideration
|
|
$
|
1,478,000
|
|
Schedule of fair value of assets and liabilities
in acquisition
|
|
|
|
|
REMOTE INTELLIGENCE
|
|
Fair Value
|
|
Cash
|
|
$
|
6,158
|
|
Accounts receivable
|
|
|
24,036
|
|
Property & equipment
|
|
|
111,636
|
|
Goodwill
|
|
|
1,729,800
|
|
Total assets
|
|
|
1,871,630
|
|
Accounts payable
|
|
|
141,859
|
|
Other long term liabilities
|
|
|
251,771
|
|
Total purchase consideration
|
|
$
|
1,478,000
|
|
These purchase price allocations are preliminary
and are pending the finalization of the third-party valuation analysis and working capital, as the Company has not yet completed the detailed
valuation analyses as of the filing date of this Form 10-Q.
TJM Electronics West, Inc.
On September 8, 2021,
we entered into and closed the Stock Purchase Agreement (the “TJM SPA”) with TJM Electronics West, Inc., an Arizona
corporation (“TJM”), and TJM’s shareholders, pursuant to which we agreed to purchase all of the equity interests
in TJM in exchange for $450,000, subject to adjustments as defined in the TJM SPA. TJM is now a wholly-owned subsidiary of the Company.
The Company has accounted for the purchase using
the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the
underlying assets and liabilities in proportion to their respective fair values. The excess of the consideration transferred over the
estimated fair values of the net assets acquired was recorded as goodwill. The following table summarizes the acquired assets and assumed
liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the Condensed Consolidated
Balance Sheet at September 30, 2021:
Schedule of fair value of assets and liabilities
in acquisition
|
|
|
|
|
|
|
Fair Value
|
|
Accounts receivable
|
|
$
|
3,400
|
|
Property & equipment
|
|
|
91,051
|
|
Goodwill
|
|
|
355,549
|
|
Total assets
|
|
|
450,000
|
|
Total purchase consideration
|
|
$
|
450,000
|
|
This purchase price allocation is preliminary
and is pending the finalization of the third-party valuation analysis and working capital, as the Company has not yet completed the detailed
valuation analyses as of the filing date of this Form 10-Q.
NOTE 3 – REVENUE
The
following table is a summary of the Company’s timing of revenue recognition for the three and nine months ended September 30, 2021
and 2020:
Schedule of timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services and products transferred at a point in time
|
|
$
|
3,500,970
|
|
|
$
|
–
|
|
|
$
|
3,500,970
|
|
|
$
|
–
|
|
Services and products transferred over time
|
|
|
138
|
|
|
|
–
|
|
|
|
328
|
|
|
|
–
|
|
Total revenue
|
|
$
|
3,500,970
|
|
|
$
|
–
|
|
|
$
|
3,500,970
|
|
|
$
|
–
|
|
The Company disaggregates revenue by source and
geographic destination to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Revenue by source consisted of the following
for the three and nine months ended September 30, 2021 and 2020:
Schedule of revenue by source consisted
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenue by products and services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,533,377
|
|
|
$
|
–
|
|
|
$
|
1,533,377
|
|
|
$
|
–
|
|
Services
|
|
|
1,967,593
|
|
|
|
–
|
|
|
|
1,967,593
|
|
|
|
–
|
|
Total revenue
|
|
$
|
3,500,970
|
|
|
$
|
–
|
|
|
$
|
3,500,970
|
|
|
$
|
–
|
|
Revenue by geographic destination consisted of
the following for the for the three and nine months ended September 30, 2021 and 2020:
Schedule of revenue by geographic destination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenue by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
120,336
|
|
|
$
|
–
|
|
|
$
|
120,336
|
|
|
$
|
–
|
|
International
|
|
|
3,380,634
|
|
|
|
–
|
|
|
|
3,380,634
|
|
|
|
–
|
|
Total revenue
|
|
$
|
3,500,970
|
|
|
$
|
–
|
|
|
$
|
3,500,970
|
|
|
$
|
–
|
|
Contract Balances
The Company records contract assets when it has
a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist
of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. As of September
30, 2021, the Company did not have a contract assets balance.
The following table is a summary of the Company’s
opening and closing balances of contract liabilities related to contracts with customers.
Schedule of contract liabilities related to contracts with customers
|
|
|
|
|
|
|
Total
|
|
Balance at December 31, 2020
|
|
$
|
–
|
|
Additions through advance billings to or payments from vendors
|
|
|
–
|
|
Additions through business acquisition
|
|
|
4,139,193
|
|
Revenue recognized from current period advance billings to or payments from vendors
|
|
|
–
|
|
Revenue recognized from amounts acquired through business acquisition
|
|
|
1,439,505
|
|
Balance at September 30, 2021
|
|
$
|
2,699,688
|
|
NOTE 4 – ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following
as of September 30, 2021 and December 31, 2020:
Schedule of accounts receivable
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Accounts receivable
|
|
$
|
5,812,003
|
|
|
$
|
–
|
|
Less: Allowance for doubtful accounts
|
|
|
–
|
|
|
|
–
|
|
Total accounts receivable
|
|
$
|
5,812,003
|
|
|
$
|
–
|
|
NOTE 5 – INVENTORY
Inventory consisted of the following as of September
30, 2021 and December 31, 2020:
Schedule of inventory
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Raw materials
|
|
$
|
209,478
|
|
|
$
|
–
|
|
Work in progress
|
|
|
1,401,521
|
|
|
|
–
|
|
Finished goods
|
|
|
19,052
|
|
|
|
–
|
|
Total inventory
|
|
|
1,630,051
|
|
|
|
–
|
|
Reserve
|
|
|
–
|
|
|
|
–
|
|
Total inventory, net
|
|
$
|
1,630,051
|
|
|
$
|
–
|
|
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following
as of September 30, 2021 and December 31, 2020:
Schedule of property, plant and
equipment
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Property and equipment
|
|
$
|
1,775,332
|
|
|
$
|
–
|
|
Leasehold improvements
|
|
|
63,180
|
|
|
|
–
|
|
|
|
|
1,838,512
|
|
|
|
–
|
|
Less - accumulated depreciation
|
|
|
(1,113
|
)
|
|
|
–
|
|
|
|
$
|
1,837,399
|
|
|
$
|
–
|
|
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
Accounts payable and accrued expenses consisted
of the following as of September 30, 2021 and December 31, 2020:
Schedule of accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Accounts payable
|
|
$
|
8,946,714
|
|
|
$
|
519,899
|
|
Accrued liabilities
|
|
|
602,591
|
|
|
|
569,970
|
|
Total accounts payable and accrued expenses
|
|
$
|
9,549,305
|
|
|
$
|
1,089,869
|
|
NOTE 8 – LEASES
We adopted ASC 842 “Leases” using
the modified retrospective approach, electing the practical expedient that allows us not to restate our comparative periods prior to
the adoption of the standard on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before
the date of adoption.
The following was included in our balance sheet
as of September 30, 2021:
Schedule of operating leases
|
|
|
|
|
Operating leases
|
|
September
30,
2021
|
|
|
|
|
|
Assets
|
|
|
|
|
ROU operating lease assets
|
|
$
|
1,476,771
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current portion of operating lease
|
|
$
|
575,446
|
|
Operating lease, net of current portion
|
|
$
|
1,592,880
|
|
Total operating lease liabilities
|
|
$
|
2,168,326
|
|
The weighted average remaining lease term and
weighted average discount rate at September 30, 2021 were as follows:
Schedule of weighted average remaining lease term and
weighted average discount rate
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
September 30,
2021
|
|
Operating leases
|
|
|
6.61
|
|
Weighted average discount rate
|
|
|
|
|
Operating leases
|
|
|
6.00%
|
|
Operating Leases
On January 12, 2021, the Company’s new
acquired subsidiary entered into an operating lease agreement to rent office space in Mumbai, India. This three-year agreement commenced
January 12, 2021 with an annual rent of approximately $50,000.
On May 27, 2021, the Company’s new acquired
subsidiary entered into an operating lease agreement to rent office space in Mumbai, United Kingdom. This ten-year agreement commenced
May 27, 2021 with an annual rent of approximately $85,000 with the first six months rent free.
The following table reconciles future minimum
operating lease payments to the discounted lease liability as of September 30, 2021:
Schedule of future minimum
operating lease payments
|
|
|
|
|
2021
|
|
|
82,394
|
|
2022
|
|
|
330,171
|
|
2023
|
|
|
324,910
|
|
2024
|
|
|
279,112
|
|
2025 and later
|
|
|
842,673
|
|
Total lease payments
|
|
|
1,859,260
|
|
Less imputed interest
|
|
|
(391,127
|
)
|
Total lease obligations
|
|
|
1,468,133
|
|
Less current obligations
|
|
|
(330,171
|
)
|
Long-term lease obligations
|
|
$
|
1,137,962
|
|
NOTE 9 – GOODWILL AND OTHER INTANGIBLE
ASSETS
Goodwill
The
following table sets forth the changes in the carrying amount of goodwill for the nine months ended September 30, 2021:
Schedule of changes in carrying amount of goodwill
|
|
|
|
|
|
|
Total
|
|
Balance at December 31, 2020
|
|
$
|
–
|
|
2021 Acquisitions
|
|
|
15,536,899
|
|
Balance at September 30, 2021
|
|
$
|
15,536,899
|
|
Intangible Assets - Intrusion Detection Intellectual
Property
The Company relies on patent laws and restrictions
on disclosure to protect its intellectual property rights. As of September 30, 2021, the Company held 3 U.S. and foreign patents on its
intrusion detection technology, which expire in calendar years 2025 through 2034 (depending on the payment of maintenance fees).
The DPTI issued patents cover a System and Method
for Brillouin Analysis, a System and Method for Resolution Enhancement of a Distributed Sensor, and a Flexible Fiber Optic Deformation
System Sensor and Method. Maintenance of intellectual property rights and the protection thereof is important to our business. Any patents
that may be issued may not sufficiently protect the Company's intellectual property and third parties may challenge any issued patents.
Other parties may independently develop similar or competing technology or design around any patents that may be issued to the Company.
The Company cannot be certain that the steps it has taken will prevent the misappropriation of its intellectual property, particularly
in foreign countries where the laws may not protect proprietary rights as fully as in the United States. Further, the Company may be
required to enforce its intellectual property or other proprietary rights through litigation, which, regardless of success, could result
in substantial costs and diversion of management's attention. Additionally, there may be existing patents of which the Company is unaware
that could be pertinent to its business, and it is not possible to know whether there are patent applications pending that the Company's
products might infringe upon, since these applications are often not publicly available until a patent is issued or published.
For the three months
ended September 30, 2021 and 2020, the Company amortized $12,757 and $12,757, respectively. Future amortization of intangible assets
is as follows:
Schedule of future amortization of intangible
assets
|
|
|
|
|
2021
|
|
$
|
12,757
|
|
2022
|
|
|
51,028
|
|
2023
|
|
|
51,028
|
|
2024
|
|
|
51,028
|
|
2025
|
|
|
51,028
|
|
Thereafter
|
|
|
138,850
|
|
Total
|
|
$
|
355,719
|
|
NOTE 10 – DEBT AGREEMENTS
Secured Debenture
DPTI issued a convertible Debenture to the University
in exchange for the Patents assigned to the Company, in the amount of Canadian $1,500,000, or US $1,491,923 on December 16, 2010, the
date of the Debenture. On April 24, 2017 DPTI issued a replacement secured term Debenture in the same C$1,500,000 amount as the original
Debenture. The interest rate is the Bank of Canada Prime overnight rate plus 1% per annum. The Debenture had an initial required payment
of Canadian $42,000 (US$33,385) due on April 24, 2018 for reimbursement to the University of its research and development costs, and this
has been paid. Interest-only maintenance payments are due annually starting after April 24, 2018. Payment of the principal begins on the
earlier of (a) three years following two consecutive quarters of positive earnings before interest, taxes, depreciation and amortization,
(b) six years from April 24, 2017, or (c) in the event DPTI fails to raise defined capital amounts or secure defined contract amounts
by April 24 in the years 2018, 2019, and 2020. The Company has raised funds in excess of the amount required by April 24, 2018. The principal
repayment amounts will be due quarterly over a six-year period in the amount of Canadian Dollars $62,500. Based on the exchange rate between
the Canadian Dollar and the U.S. Dollar on September 30, 2021, the quarterly principal repayment amounts will be US$49,750. The Debenture
is secured by the Patents assigned by the University to DPTI by an Assignment Agreement on December 16, 2010. DPTI has pledged the Patents,
and granted a lien on them pursuant to an Escrow Agreement dated April 24, 2017, between DPTI and the University.
The Debenture was initially recorded at the $1,491,923
equivalent US Dollar amount of Canadian $1,500,000 as of December 16, 2010, the date of the original Debenture. The liability is being
adjusted quarterly based on the current exchange value of the Canadian dollar to the US dollar at the end of each quarter. The adjustment
is recorded as unrealized gain or loss in the change of the value of the two currencies during the quarter. The amounts recorded as an
unrealized loss for the three months ended September 30, 2021 and 2020, were $16,155 and $39,047 respectively. These amounts are included
in Accumulated Other Comprehensive Loss in the Equity section of the consolidated balance sheet, and as Unrealized Loss on Foreign Exchange
on the consolidated statement of comprehensive loss. The Debenture also includes a provision requiring DPTI to pay the University a two
percent (2%) royalty on sales of any and all products or services which incorporate the Patents for a period of five years from April
24, 2018.
For the three months ended September 30, 2021,
and 2020, the Company recorded interest expense of $13,168 and $12,255, respectively.
As of September 30, 2021 the debenture liability
totaled $1,184,516, all of which was long term.
Future minimum required payments over the
next 5 years and thereafter are as follows:
Schedule of future minimum debt payments
|
|
|
|
|
Period ending September 30,
|
|
|
|
|
2022
|
|
$
|
–
|
|
2023
|
|
|
–
|
|
2024
|
|
|
–
|
|
2025
|
|
|
–
|
|
2026 and after
|
|
|
1,184,516
|
|
Total
|
|
$
|
1,184,516
|
|
Convertible Debt Securities
The Company uses the Black-Scholes Model to calculate
the derivative value of its convertible debt. The valuation result generated by this pricing model is necessarily driven by the value
of the underlying common stock incorporated into the model. The values of the common stock used were based on the price at the date of
issue of the debt security as of September 30, 2021. Management determined the expected volatility of 359.78%,
a risk-free rate of interest of 0.09%,
and contractual lives of the debt varying from six months to two years. The table below details the Company's nine outstanding convertible
notes, with totals for the face amount, amortization of discount, initial loss, change in the fair market value, and the derivative liability.
Schedule of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face
|
|
|
Debt
|
|
|
Initial
|
|
|
Change
|
|
|
Derivative
Balance
|
|
|
|
Amount
|
|
|
Discount
|
|
|
Loss
|
|
|
in FMV
|
|
|
9/30/2021
|
|
|
|
$
|
90,228
|
|
|
$
|
–
|
|
|
$
|
58,959
|
|
|
$
|
30,042
|
|
|
$
|
108,530
|
|
|
|
|
162,150
|
|
|
|
–
|
|
|
|
74,429
|
|
|
|
42,819
|
|
|
|
195,041
|
|
|
|
|
72,488
|
|
|
|
–
|
|
|
|
11,381
|
|
|
|
(25,482
|
)
|
|
|
87,192
|
|
|
|
|
53,397
|
|
|
|
–
|
|
|
|
5,651
|
|
|
|
13,592
|
|
|
|
94,615
|
|
|
|
|
53,864
|
|
|
|
–
|
|
|
|
28,566
|
|
|
|
(69,333
|
)
|
|
|
–
|
|
|
|
|
18,613
|
|
|
|
–
|
|
|
|
16,558
|
|
|
|
(13,512
|
)
|
|
|
–
|
|
|
|
|
40,000
|
|
|
|
–
|
|
|
|
10,605
|
|
|
|
(51,397
|
)
|
|
|
–
|
|
|
|
|
42,350
|
|
|
|
–
|
|
|
|
7,350
|
|
|
|
54,120
|
|
|
|
–
|
|
|
|
|
94,200
|
|
|
|
–
|
|
|
|
19,200
|
|
|
|
(105,683
|
)
|
|
|
–
|
|
|
|
|
76,200
|
|
|
|
–
|
|
|
|
16,200
|
|
|
|
(86,548
|
)
|
|
|
–
|
|
|
|
|
64,200
|
|
|
|
–
|
|
|
|
14,200
|
|
|
|
(74,788
|
)
|
|
|
–
|
|
|
|
|
825,000
|
|
|
|
733,387
|
|
|
|
203,500
|
|
|
|
–
|
|
|
|
–
|
|
Subtotal
|
|
|
1,584,574
|
|
|
|
733,387
|
|
|
|
466,599
|
|
|
|
(517,087
|
)
|
|
|
479,088
|
|
Transaction expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
1,584,574
|
|
|
$
|
733,387
|
|
|
$
|
466,599
|
|
|
$
|
(517,087
|
)
|
|
$
|
479,088
|
|
On July 14, 2021, the Company entered a Securities
Purchase Agreement (the “GS SPA”) with GS Capital Partners, LLC (the “Lender”), pursuant to which the Company
issued to the Lender a 6% Redeemable Note in the principal amount of $2,000,000 (the “Note”). The purchase price of the Note
is $1,980,000. The Note matures on July 14, 2022 upon which time all accrued and unpaid interest will be due and payable. Interest accrues
on the Note at 6% per annum until the Note becomes due and payable. The Note is subject to various “Events of Default,” which
are disclosed in the Note. Upon the occurrence of an “Event of Default,” the interest rate on the Note will be 18%. The Note
is not convertible into shares of the Company’s Common Stock and is not dilutive to existing or future shareholders and the Company
plans on using a portion of the proceeds of the Note to retire existing convertible debt.
As of September 30, 2021 and 2020 respectively,
there was 1,584,574 and $1,072,663 of convertible debt outstanding, net of debt discount of $965,921, and $1,313, As of September 30,
2021 and 2020 respectively, there was derivative liability of $893,381 and $1,232,344 related to convertible debt securities.
NOTE 11 - STOCKHOLDERS' DEFICIT
As of September
30, 2021, there were 4,922,968,442 shares of common stock and 88,235 shares of preferred
stock issued and outstanding.
Preferred Stock
In accordance with the Company’s Certificate
of Incorporation, the Company has authorized a total of 2,000,000 shares of preferred stock, par value $0.01 per share, for all classes.
As of September 30, 2021, and December 31, 2020, there were 88,235 total preferred shares issued and outstanding for all classes.
During the three months ended September 30, 2021,
the Company issued no shares of preferred stock.
Common Stock
In accordance with the Company’s bylaws,
the Company has authorized a total of 20,000,000,000 shares of common stock, par value $0.0001 per share. As of September 30, 2021 and
December 31, 2020, there were 4,922,968,442 and 4,088,762,156 common shares issued and outstanding.
During the three months ended September 30, 2021,
the Company issued the following shares of common stock:
On July 12, 2021, the Company issued an aggregate
of 1,784,146 shares of common stock upon the conversion of convertible debt, as issued on January 12, 2021, in the amount of $42,350.
On July 14, 2021, the Company issued an aggregate
of 45,037,115 shares of common stock upon the conversion of convertible debt, as issued on October 7, 2020, in the amount of $93,864 and
interest of $26,246.
On July 19, 2021, the Company issued an aggregate
of 2,898,382 shares of common stock upon the conversion of convertible debt, as issued on October 7, 2020, in the amount of $10,497 and
interest of $6,748.
Stock Options
During the three months ended September 30, 2021,
the Company did not issue any stock options and had no stock options outstanding at September 30, 2021.
Public Offerings
On August 19, 2021, we entered into the Purchase
Agreement with GHS, for the offering of up to $45,000,000 worth of Common Stock. Pursuant to the Purchase Agreement, on August 19, 2021,
we and GHS agreed that we would issue and sell to GHS, and GHS would purchase from the Company, 31,799,260 shares of Common Stock for
total proceeds to the Company, net of discounts, of $3,300,000, at an effective price of $0.1038 per share (the “First Closing”).
We received approximately $2,790,000 in net proceeds from the First Closing after deducting the fees and other estimated offering expenses
payable by us. We used the net proceeds from the First Closing for working capital and for general corporate purposes. The shares were
issued to GHS in a registered direct offering, pursuant to a prospectus supplement to our currently effective registration statement on
Form S-3 (File No. 333-257826), which was initially filed with the SEC on July 12, 2021, and was declared effective on August 18, 2021.
On September 30, 2021, the Company paid a $275,000 placement fee to J.H. Darbie & Co, $125,000 cash and $150,000 with 1,073,730 shares
of common stock.
Pursuant to the Purchase Agreement, on August
31, 2021, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 27,297,995
shares of Common Stock for total proceeds to us, net of discounts, of $3,300,000,
at an effective price of $0.120888 per share (the “Second Closing”). We received approximately $2,885,000 in net
proceeds from the Second Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds
from the Second Closing for working capital and for general corporate purposes. The shares were issued to GHS in a registered direct
offering, pursuant to a prospectus supplement to our currently effective registration statement on Form S-3 (File No. 333-257826), which
was initially filed with the SEC on July 12, 2021, and was declared effective on August 18, 2021. On September 30, 2021, the Company
paid a $262,000 placement fee to J.H. Darbie & CO, $112,000 cash and $150,000 with 1,185,771 shares of common stock.
Pursuant to the Purchase Agreement, on September
22, 2021, we and GHS agreed that we would issue and sell to GHS, and GHS would purchase from us, 25,630,272
shares of Common Stock for total proceeds to us, net of discounts, of $2,000,000, at an effective price of $ $0.085836 per share
(the “Third Closing”). We received approximately $1,915,000 in net proceeds from the Third Closing after deducting
the fees and other estimated offering expenses payable by us. We used the net proceeds from the Third Closing for working capital and
for general corporate purposes. The shares were issued to GHS in a registered direct offering, pursuant to a prospectus supplement to
our currently effective registration statement on Form S-3 (File No. 333-257826), which was initially filed with the SEC on July 12,
2021, and was declared effective on August 18, 2021. On September 30, 2021, the Company paid a $185,000 placement fee to J.H. Darbie
& CO, $85,000 cash and $100,000 with 934,580 shares of common stock.
NOTE 12 – RELATED PARTY TRANSACTIONS
The Company follows subtopic
850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions. Pursuant
to Section 850-10-20 the related parties include a) affiliates of the Company; b) Entities for which investments in their equity securities
would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted
for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that
are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties
with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) Other parties
that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in
one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might
be prevented from fully pursuing its own separate interests. The financial statements shall include disclosures of material related
party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business.
However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required
in those statements. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions,
including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented,
and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the
dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the
method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date
of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
During the three months ended September 30, 2021
and 2020, the Company’s Chief Executive Officer advanced personal funds in the amount of $0 and $10,582 for Company expenses. As
of September 30, 2021, the Company’s Chief Executive Officer is owed a total of $23,980 for advanced personal funds.
NOTE 13 - COMMITMENTS & CONTINGENCIES
Potential Royalty Payments
The Company, in consideration of the terms of
the debenture to the University of New Brunswick, shall pay to the University a two percent royalty on sales of any and all products
or services which incorporate the Company's patents for a period of five years from April 24, 2018.
Legal Matters
Carebourn Capital, L.P.
On January 29, 2021, Carebourn Capital, L.P. (“Carebourn”)
commenced suit against the Company in the 4th Judicial District (Hennepin County District Court) (Minnesota), alleging the Company breached
the terms and conditions of two convertible promissory notes and accompanying securities purchase agreements Carebourn and the Company
entered into on July 17, 2018 and July 24, 2018, respectively.
Also on January 29, 2021, Carebourn moved for
a temporary injunction to enjoin the Company from transferring any shares of its common stock to any third parties. Following submission
of briefing by both parties and oral arguments on Carebourn’s motion, on March 17, 2021, the Court denied Carebourn’s motion
for a temporary injunction.
On April 14, 2021, Carebourn filed an amended
complaint and asserted new claims. On May 13, 2021, the Company filed a motion to dismiss Carebourn’s amended complaint, arguing
that Carebourn is conducting itself as an unregistered dealer, in violation of Section 15(a) of the Securities and Exchange Act of 1934
(the “Act”), and, pursuant to Section 29(b) of the Act, the Company is entitled to have all contracts arising under
the unlawful securities transaction declared void ab initio and seek rescissionary damages for any unlawful securities transactions effected
by Carebourn.
As of the date hereof, a ruling has not been issued
on the foregoing motions to dismiss filed by the Company and other defendants. Furthermore, as of the date hereof, the Company and Carebourn
are conducting discovery. The Company intends to defend itself against the allegations asserted in Carebourn’s amended complaint
and interpose the defenses provided under the Act, including but not limited to asserting that Carebourn is an unregistered dealer acting
in violation of Section 15(a) and, pursuant to Section 29(b), the Company interposing its right to rescind the unlawful securities contracts
in their entirety and, furthermore, seek rescissionary damages for any unlawful securities transactions effected by Carebourn. The Company
contends that its arguments are brought in good faith, particularly in light of recent SEC enforcement actions and the SEC’s ongoing
investigation against Carebourn, among other parties, for violations of federal securities laws, including violations of Section 15(a)
of the Act. See U.S. Securities and Exchange Commission v. Carebourn Capital, LP et al, Case No. 1:20-cv-07162 (N.D. Ill.).
Former DarkPulse Officers
On September 10, 2021, Stephen Goodman, Mark Banash,
and David Singer (the “Former Officers”), all former officers and employees of the Company, commenced suit against
the Company in Arizona Superior Court, Maricopa County. The complaint alleges the Company breached the rights of the Former Officers in
connection with Series D preferred stock issued to the Former Officers. The Company intends to defend itself against the allegations asserted
in the Former Officers’ complaint. if the case progresses the Company will
file countersuits against all plaintiffs.
More Capital, LLC
On June 29, 2021, More Capital, LLC (“More”)
commenced suit against the Company, et al., in the 4th Judicial District (Hennepin County District Court) (Minnesota), alleging the Company
breached the terms and conditions of a convertible promissory note and accompanying securities purchase agreement More and the Company
entered into on August 20, 2018.
On July 20, 2021, the Company filed a motion to
dismiss More’s complaint, arguing that the claims asserted against the Company fail to state a claim upon which relief can be granted.
The Company intends to defend itself against
the allegations asserted in More’s complaint and interpose the defenses provided under the Act, including but not limited to asserting
that More is an unregistered dealer acting in violation of Section 15(a) of the Act and, pursuant to Section 29(b) of the Act, the Company
interposing its right to rescind the unlawful securities contracts in their entirety and, furthermore, seek rescissionary damages for
any unlawful securities transactions effected by More. The Company contends that its arguments are brought in good faith, particularly
in light of recent SEC enforcement actions and the SEC’s ongoing investigation against More, among other parties, for violations
of federal securities laws, including violations of Section 15(a) of the Act. See U.S. Securities and Exchange Commission v. Carebourn
Capital, LP et al, Case No. 1:20-cv-07162 (N.D. Ill.).
From time to time, we may become involved in litigation
relating to claims arising out of our operations in the normal course of business. We are not currently involved in any pending legal
proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are
a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on our business,
financial condition and operating results.
NOTE 14– SUBSEQUENT EVENTS
The Company evaluated events occurring after the
date of the accompanying unaudited condensed consolidated balance sheets through the date the financial statements were issued and has
identified the following subsequent events that it believes require disclosure:
Effective October 1,
2021, we entered into and closed the Membership Purchase Agreement (the “TerraData MPA”) with TerraData Unmanned, PLLC,
a Florida limited liability company (“TerraData”), and Justin Dee, the sole shareholder of TerraData, pursuant to which
we agreed to purchase 60% of the equity interests in TerraData in exchange for 3,725,386 shares of our Common Stock and $400,000, subject
to adjustments as defined in the TerraData MPA, to be paid within 12 weeks of closing. TerraData is now a subsidiary of the Company.
Pursuant to the Purchase Agreement, on October
1, 2021, we and GHS agreed that we would issue and sell to GHS, and GHS would purchase from us, 37,187,289
shares of Common Stock for total proceeds to us, net of discounts, of $3,000,000, at an effective price of $0.08874 per share (the “Fourth
Closing”). We received approximately $2,850,000 in net proceeds from the Fourth Closing after deducting the fees and other estimated
offering expenses payable by us. We used the net proceeds from the Fourth Closing for working capital and for general corporate purposes.
The shares were issued to GHS in a registered direct offering, pursuant to a prospectus supplement to our currently effective registration
statement on Form S-3 (File No. 333-257826), which was initially filed with the SEC on July 12, 2021, and was declared effective on August
18, 2021.
Pursuant
to the Purchase Agreement, on October 14, 2021, we and GHS agreed that we would issue and sell to GHS, and GHS would purchase from us,
14,282,304 shares of Common Stock for total proceeds to us, net of discounts, of $1,055,000, at an effective price of $0.08125 per share
(the “Fifth Closing”). We received approximately $1,002,250 in net proceeds from the Fifth Closing after deducting
the fees and other estimated offering expenses payable by us. We used the net proceeds from the Fifth Closing for working capital and
for general corporate purposes. The shares were issued to GHS in a registered direct offering, pursuant to a prospectus supplement to
our currently effective registration statement on Form S-3 (File No. 333-257826), which was initially filed with the SEC on July 12,
2021, and was declared effective on August 18, 2021.